Pricing and costing optimization project
In the first year, the management of AAA was not satisfied with the profitability of the company although we have better service than our competitor BBB. In order to maximize the customer satisfaction and profitability, we will have following 2-step approach for the second and the third year.
- Strategies in second year: capture market share, lower the break-even point, balance the profit and customer satisfaction
- Focus on the segment 3
According to the conjoint analysis in first year, the threshold prices in segment 3 and 4 are much higher. But segment 3 has larger market size which brings more subscriptions and transfer higher revenue to AAA. In order to gain more market share and revenue, we will focus only on segment 3 for the following 2 years and will convert more customers of segment 3 from BBB by promoting our premium product, increasing the data updating interval (2 months instead of 4 months) which is highly valued by segment 3 (will add extra EUR110, 000 in Data Search & Editing) and adding more people to provide better services.
- Cut the conversion activity
According the cost calculation, conversion costs which are the main concern of the small companies (segment 1 and segment 2), however, are the highest among the sales activities. Customers in our focused group Segment 3 (bigger companies) which, on the other hand, place lower level of importance on conversion cost. While some other activities such as data search and edit are necessary, we regard conversion activity as an “Accessory and non-constrained activity” which can’t bring much value to our profitability. Therefore, we will cut conversion activity for the second year in order to reduce the costs and improve our profitability. As a result, the customers in segment 1 and 2 who were serviced with conversion activity in the 1st year would possibly cancel the contracts in the following years. We will subtract these customers from the total number. There will be still a good amount of remaining customers (2,840), with which we can still achieve a good margin.
- Limit the management consultancy activity only to segment 3
The cost of consultancy for segment 4 in particular is very high due to the cost attributed to long consultancy hours. Even if we set the price of segment 4 at EUR1, 900 (the threshold price) to serve the old customers, the profit of segment 4 will still be negative. Plus consultancy is not very important for both segment 1 and 2 according to previous research. Therefore, we will limit our product that we will provide for segment 1, 2 and 4. We will use consultancy activity only for segment 3 with only 1 working force, which is sufficient because consultancy is also not highly required by the segment 3. We estimate as a result, although the number of customers from segment 4 will be lower in the following years, the cost will be greatly reduced.
- Increase the labor force in after-sales assistance and limit this activity only to segment 3
After cutting cost for conversion, we will also cut the working force for conversion and consultancy activity so that we can have budget to hire more people to conduct after sales assistance. We will cut the 2 people in conversion and 2 people in consultancy (assuming their contracts will end very soon). Then we can hire 4 more people in after sales assistance instead which will add production capacity to 12,800 hours, allowing us to serve 3,200 customers in customer 3. As long as the number of customers doesn’t exceed 3,200, we can provide service for 100% of the customers in segment 3. At the same time, we will limit after sales assistance only to customer segment 3. It would also be possible that the customers who used such activity in segment 1, 2, and 4 would cancel their contracts. We will also subtract these customers from the total number.
- Moderate price policy
Take into account the cost of converting current BBB customers, the sales price for the second year should not be very aggressive because we want to capture more market share and compete with our competitor BBB. But we will differentiate our price for different customers because of different services we will provide. We will keep the current price (EUR1, 100) for the old customers in the segment 1, 2, and 4. On the other hand, due to the fact that the customers in segment 3 are more willing to pay for good service and we have competitive advantages regarding updating interval and sufficient work forces to carry out after sales assistance, we believe we can have more market share if we charge the same price as BBB (EUR 1,200 for BBB) does for the segment 3. With this price, we expect to achieve operating profit of EUR1.27 million in the 2rd year.
- Strategies in the third year: more profitable and more customer satisfaction
- Recruit more customers and hire more people to keep them happy
In the 3rd year, we will continue our effort to recruit more customers in segment 3. Meanwhile, after starting making profit in the 2rd year, we can afford more labor cost in after sales assistance. Our plan is to occupy the most of the market share in the segment 3 and to have 4,400 customers which require 11 working force with a total of 17,600 hours of production capacity. So we will hire 3 more people in after sales assistance. The cost will be recalculated in consideration of the adjustment of the labor cost as shown in the income statement (EUR1, 150,000). We assume that with this effort we will be able to serve almost 100% of the customers in segment 3 in the 3rd year.
- Further increase the sales price
If we successfully acquire the most market share in the segment 3 and our customers in the segment 3 are satisfied with our product and service and they are less price sensitive, it could be the time to charge them with higher price in the third year which will surely be lower than threshold price (EUR 1,813). Our target price is to achieve EUR 1,400 in segment 3 in the third year.
With such price and optimized service provided for our targeting group, we believe we can maximize our profit and customer satisfaction. We expect to achieve the final operating profit of EUR3.1 million in the third year as shown in the income statement.